Listen very carefully, and you can hear the changing of the guard. No, it is not the spectacle of Buckingham Palace. It is the preparations for the 20th National Congress of the Chinese Communist Party on Oct 16 — the most important political event of the decade in China.
In some ways, the coverage of the National Congress is like the media coverage of the new King, focusing on minor details as a guide to how things will develop. The King’s spat with a leaking pen in Scotland is said to sign significant changes in how the monarchy will rule.
The same applies to the detail of actions in the Politburo, who sits where and who wears what. We provide no analysis of these actions, but businesses must prepare for some inevitable disruption by changing the guard in China.
Much of the attention is focused on Chinese President Xi Jinping’s third term, but Premier Li Keqiang’s retirement is more significant. Li, an economist by profession, brought a sophisticated approach to understanding the Chinese economy and how it needed to develop to face the challenges of the inevitable slowdown in growth rates.
Xi introduced the concept of the dual circulation economy. Still, Li put flesh on these bones by enabling the foundation regulations of the digital economy. Those decisions opened a new range of business opportunities and changed how the country conducted business.
Irrespective of who becomes the new Premier — and regardless of other changes in the composition of the Central Committee — business knows some things we can expect.
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The first is policy paralysis lasting weeks, if not months. The trickle-down impact of leadership changes causes this paralysis, triggering changes at the provincial level, with governors being promoted or demoted and transferred to new provinces. Each region also changes the senior bureaucracy when the local governor changes.
This reshuffling plays out over weeks and months with two impacts. The first impact is that leaders in existing positions will not undertake new activities because they do not understand how things may change. What will be the latest priorities, and how will they be implemented?
The result is a slowdown in decision-making. Customary approvals are delayed because details on decisions made at the party congress will not be formalised until the “two sessions” annual parliamentary meeting in early March.
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staff are deployed or promoted. It takes time for the new leadership to put their imprint on their department and the local services they are responsible for. It also takes time for these new leaders to understand the political direction implemented by the Central Committee fully.
With changing the guard, it will not be business as usual. Companies need to be patient and tolerant of the inevitable delays in decisions. They also need to be alert and astute to understand the priorities emerging from the National Congress, which may include changes to the country’s Covid-19 policy.
Technical outlook for the Shanghai market
The Shanghai Index has moved below the lower edge of the trading band and is moving towards lower support, near 3,050. This is a long-term support level.
The lower edge of the initial sideways pattern is around 3,170. The index was oscillating around 3,220, shown in line B. The rapid fall below line B is very bearish. The size of the move shows the sideways oscillation behaviour has ended, and support has failed.
Two right-hand shoulder peaks have confirmed the weak head and shoulder trend reversal pattern. These extended developments have become a common feature of this pattern in recent years. As we discussed last week, the head and shoulder patterns are bearish, with a downside target near 3,100.
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This target has been achieved, and the index consolidates near this target value. This is not a historical support level, so there is a strong probability the market will test historical support near line A at 3,050.
The Guppy Multiple Moving Average (GMMA) relationships show intense downward selling pressure and are now defined as a significant trend. The expansion in the long-term of the GMMA shows increasing selling pressure. An increase in selling pressure is shown when the long-term GMMA expands significantly.
The expansion of the short-term GMMA shows traders have turned bearish and are overwhelming the market with selling.
The long-term GMMA is moving down and expanding. The short-term GMMA has moved below the lower edge of the long-term GMMA, confirming a weakening market.
Trades watch for consolidation rebound patterns to develop near the historical support level line A.
Daryl Guppy is an international financial technical analysis expert and special consultant to Axicorp. He has provided weekly Shanghai Index analysis for mainland Chinese media for two decades. Guppy appears regularly on CNBC Asia and is known as “The Chart Man”. He is a national board member of the Australia China Business Council. The writer owns China stock and index ETFs
